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Why Wall Street Isn’t Useful for the Real Economy


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#21 J-CA

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Posted 02 January 2019 - 03:10 PM

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And this doesn't help his case for being taken seriously either.
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#22 LFC

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Posted 02 January 2019 - 03:34 PM

Dude, you have a serious hard-on about Schiff. At least you could bear to say "His correct argument was that fundamentally there was a lowering of standards in lending and a bubble in the housing market and that bubble burst..." which, of course, was the original point I was making (and explained again that it was the original point) contra Laffer who said that this time was different and the skyrocketed real estate prices were real value.

On a separate note Phil Gramm is now out whining about the Fed and interest rate adjustments. You'd think as an architect of the structural changes that lead to the collapse he'd be a bit more circumspect about preaching on economics. In fact if he had any shame Mr. "Mental Recession" would never show his face again.
" 'Individual conscience' means that women only get contraceptives if their employers, their physicians, their pharmacists, their husbands and/or fathers, pastors, and possibly their mayors, Governors, State Secretaries of Health, Congressmen, Senators, and President all agree that in that particular case they're justifiable." --D.C. Sessions

"That's the problem with being implacable foes - no one has any incentive to treat you as anything more than an obstacle to be overcome."

"The 'Road to Serfdom' is really all right turns." --Progressive Whisperer

""The GOP ... where every accusation is also a confession." --Progressive Whisperer

#23 J-CA

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Posted 02 January 2019 - 10:15 PM

View PostLFC, on 02 January 2019 - 03:34 PM, said:

Dude, you have a serious hard-on about Schiff. At least you could bear to say "His correct argument was that fundamentally there was a lowering of standards in lending and a bubble in the housing market and that bubble burst..." which, of course, was the original point I was making (and explained again that it was the original point) contra Laffer who said that this time was different and the skyrocketed real estate prices were real value.
I don't know why you are so hung up about the fact that I have rightly pointed out that the dude is a quack, because, he's obviously a quack.
I pointed out that he was a quack because I didn't want anybody reading your comment to think that he was a credible person, because he is not, as demonstrated by all the other not-credible behaviour I pointed out. You see, I wanted to fully inform everyone here of his full body of work, for their, and your, edification.
You are welcome.
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#24 George Rowell

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Posted 03 January 2019 - 12:50 AM

View PostJ-CA, on 01 January 2019 - 04:32 PM, said:

Yes, he is essentially wrong about that. His idea, for example, that personal indebtedness is a direct cause of the large federal debt is completely nonsensical.
His correct argument was that fundamentally there was a lowering of standards in lending and a bubble in the housing market and that bubble burst, but as one person once said, he has successfully called 17 or the last 2 recessions.
Better to listen to any one of the many other qualified people who made better and more specific arguments about what was to come, most of whom were wise enough to not stick a specific date on their predictions. (Dean Baker or Roubini both come to mind.)


Credit card debt was not addressed by TARP and was, rightly, never regarded as a system risk in 2008 and onwards. There was no scramble to "fix" credit cards because they were never really a problem. Credit card leverage is an issue of lax standards for certain but it is not something that is impacted by an asset bubble because it is unsecured credit. This is not like Y2K where there were warning signs and the problem got fixed, it just isn't. The revolving credit card market is fundamentally different, and really small.
There is that, but then there are also all the other things I listed.

Schiff's record speaks for itself, he is certainly more credible than the least credible talking heads on television, but on the spectrum.. I mean, if you had taken his advice and put your money on gold in 2009 and waited for the $5000 ounce you'd still be waiting and you'd have made more money if you had locked in on a 4% bond for the last decade. And frankly, the hyperinflation predictions are just completely disqualifying and have the whiff of a grift on them given the sort of funds he runs (and the offshore(!!) bank he runs).

I think the best way to put this into perspective is that if you think Paul Krugman knows what he is talking about then you are kind of forced to concede that Schiff doesn't.
About ten years ago there was a London conference on making money. The new thing was debt, basically making money from peoples grief. There was a BBC program about it too. It turns out you can make money from debt as easily as you can make money from affluence, and more importantly, get your hapless clients 'locked in'. Includes credit cards, payday loans, renting, hiring and all sorts of obnoxious practices.
A doctor knows a little about a lot. A specialist knows a lot about a little. In time the doctor knows less and less about more and more and the specialist knows more and more about less and less until ultimately the doctor knows nothing about everything and the specialist knows everything about nothing.

#25 J-CA

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Posted 03 January 2019 - 05:31 PM

View PostGeorge Rowell, on 03 January 2019 - 12:50 AM, said:

About ten years ago there was a London conference on making money. The new thing was debt, basically making money from peoples grief. There was a BBC program about it too. It turns out you can make money from debt as easily as you can make money from affluence, and more importantly, get your hapless clients 'locked in'. Includes credit cards, payday loans, renting, hiring and all sorts of obnoxious practices.
The mortgage industry is, largely, a positive thing for the modern economy when it is putting peoples' future earnings to work at reasonable rates to build housing stock that those people do in fact want - particularly given that in the absence of individual mortgage finance what you would have is a larger real estate investment class earning literal rents.
I don't think that credit cards are themselves inherently unethical though I think there should be a code of conduct for credit card lenders that dictates that people with significant histories of carrying rotating credit card debt should be cut of from the service for their own good.
Rent-to-own, payday loans, most hire purchase for used automobiles or consumer goods, and most in-house financed sales businesses are pretty much just a bad thing with no redeeming value whatsoever - a world where those services did not exist would almost certainly be a better one.
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#26 LFC

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Posted 03 January 2019 - 05:39 PM

View PostJ-CA, on 03 January 2019 - 05:31 PM, said:

The mortgage industry is, largely, a positive thing for the modern economy when it is putting peoples' future earnings to work at reasonable rates to build housing stock that those people do in fact want - particularly given that in the absence of individual mortgage finance what you would have is a larger real estate investment class earning literal rents.
I don't think that credit cards are themselves inherently unethical though I think there should be a code of conduct for credit card lenders that dictates that people with significant histories of carrying rotating credit card debt should be cut of from the service for their own good.
Rent-to-own, payday loans, most hire purchase for used automobiles or consumer goods, and most in-house financed sales businesses are pretty much just a bad thing with no redeeming value whatsoever - a world where those services did not exist would almost certainly be a better one.

The thing that staggers me (and part of your code of conduct comment) is how much they are willing to lend. I remember the first time we were pre-approved for a mortgage. I was flabbergasted at how much money they were willing to loan and what the monthly payment amount was that they thought was reasonable.
" 'Individual conscience' means that women only get contraceptives if their employers, their physicians, their pharmacists, their husbands and/or fathers, pastors, and possibly their mayors, Governors, State Secretaries of Health, Congressmen, Senators, and President all agree that in that particular case they're justifiable." --D.C. Sessions

"That's the problem with being implacable foes - no one has any incentive to treat you as anything more than an obstacle to be overcome."

"The 'Road to Serfdom' is really all right turns." --Progressive Whisperer

""The GOP ... where every accusation is also a confession." --Progressive Whisperer

#27 J-CA

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Posted 04 January 2019 - 08:51 AM

View PostLFC, on 03 January 2019 - 05:39 PM, said:

The thing that staggers me (and part of your code of conduct comment) is how much they are willing to lend. I remember the first time we were pre-approved for a mortgage. I was flabbergasted at how much money they were willing to loan and what the monthly payment amount was that they thought was reasonable.
I think your experience has a lot to do with the first rule of mortgage lending: offer your good customers too much credit and you bad customers too little. The debt-to-equity ratio that a bank is comfortable with works on an inverse logarithmic scale with respect to your credit rating. (And if you think about it, it makes a lot of sense, low-risk customers are such because they have a loooong track record of super-reliable behaviour, they are probably risk-averse, have concerns about reputational risks, and just have a history of honest-dealing.)

I think one of the more interesting things that has come up after year of reflecting on the data generated by the great recession is the extent to which the mortgage crisis was fundamentally an asset bubble and an asset bubble only. The empirical evidence that lax standards were a significant contributing factor to the crisis has become weaker over time, rather permitting reasonable leverage on bubble-inflated assets is where most of the money was.
https://www.nber.org/papers/w20848
https://www.nber.org/papers/w21261
Which is really disappointing because who didn't love having such an easy way to blame poor people for the Great Recession?
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#28 LFC

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Posted 04 January 2019 - 11:31 AM

View PostJ-CA, on 04 January 2019 - 08:51 AM, said:

I think one of the more interesting things that has come up after year of reflecting on the data generated by the great recession is the extent to which the mortgage crisis was fundamentally an asset bubble and an asset bubble only. The empirical evidence that lax standards were a significant contributing factor to the crisis has become weaker over time, rather permitting reasonable leverage on bubble-inflated assets is where most of the money was.
https://www.nber.org/papers/w20848
https://www.nber.org/papers/w21261
Which is really disappointing because who didn't love having such an easy way to blame poor people for the Great Recession?

I'm confused. I just skimmed the opening paragraphs and it seems to say that it wasn't primarily the poor and it wasn't primarily subprime. I don't see these as particularly controversial statements here at TRS though there was a big bump in subprime (which doesn't necessarily equate to "poor"). Of course it is completely contrary to the right-wing trope that the Community Reinvestment Act was to blame for forcing banks to make bad loans but then that was always a complete and total lie from the get-go.

What I'd like to know is what is the definition of "lax standards?" It seems like so-called "prime" that was privately underwritten could have had a significant percentage of "lax standards" when originated i.e. "liar loans". I've pointed out multiple times that the failure rate of privately backed loans was way above Fannie and Freddie backed loans. (IIRC it was something like 8x private to F&F.) So it seems like it's more an issue private vs. F&F, not prime vs. subprime, with private failing more because of lax standards.

Without reading both all the way through (and I won't have the time for weeks) I'd like to know if they made the case that lax standards weren't the primary cause or if they made the case that subprime wasn't the primary cause. They're two very different things.
" 'Individual conscience' means that women only get contraceptives if their employers, their physicians, their pharmacists, their husbands and/or fathers, pastors, and possibly their mayors, Governors, State Secretaries of Health, Congressmen, Senators, and President all agree that in that particular case they're justifiable." --D.C. Sessions

"That's the problem with being implacable foes - no one has any incentive to treat you as anything more than an obstacle to be overcome."

"The 'Road to Serfdom' is really all right turns." --Progressive Whisperer

""The GOP ... where every accusation is also a confession." --Progressive Whisperer

#29 J-CA

    Probably in one of my drunken stupors..

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Posted 04 January 2019 - 12:12 PM

Sub-prime and liar-loans are highly correlated:
https://www.nytimes....isis-worse.html

Quote

..the incomes reported on applications should not be taken seriously. They note that income reported to the I.R.S. in these ZIP codes fell in subsequent years... Moreover, the borrowers defaulted at very high rates, behaving like people who borrowed more than they could afford. And the pattern is particular to areas of concentrated subprime lending. There is no income gap in ZIP codes where people mostly took conventional loans.
That said, lax standards and fraud are also different things. Laxer standards would have actually lowered the amount and degree of fraud.

The problem for banks always comes back to how to value the asset, their best mechanism is to look at the current market and then be conservative, when a genuine asset bubble exists that mechanism stops working and what were once very strict standards become relatively lax. The Bush administration passed rules in efforts to price F&F out of the market in late-2005 or 2006 (I don't remember which) and that made F&F's standards much higher and shrunk their portfolio. This wasn't "government wisdom" or careful stewardship of F&F it was an attempt to sabotage them so private firms could take a bigger share of the market.
It is self-evident that stricter standards would have reduced default rates, and F&F demonstrated that this was true and it is literally always true - if your standards are to never lend anything you never face a default. But it is hard to argue that the standards that perpetuated the crisis were "lax" - this crisis was different in character to the Asian financial crisis for example where standards had simply been thrown out the window completely by the local firms - the systemic risks that caused the whole thing to fall apart where further up the food chain than loan origination (which is kind of a good thing because fixing the CDS market is actually way easier than figuring out the degree of risk a lender is taking on for any individual mortgage in any particular market).
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#30 LFC

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Posted 04 January 2019 - 02:41 PM

Barry Ritholtz responds to an article at MarketWatch entitled Your Love of Index Funds Is Terrible for Our Economy by somebody named Michael Brush. Brush blames index funds for all sorts of evils in the market. Ritholtz is having none of it.

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During the past 40 years, low-cost indexing has risen from an abstract financial theory with very few takers to a juggernaut sucking up most of the new money flowing into equity investments. BlackRock Inc., Vanguard Group Inc. and State Street Corp.,1 the top three indexers, collectively own more than 10 percent of every company in the U.S. They own lots of overseas stakes as well.

This shift represents an existential threat to numerous parts of the financial services industry: once investors decide to simply “buy the market,” many types of financial jobs are no longer necessary, from human traders to newsletter writers to various active management strategies.

I was reminded of this by a deeply flawed analysis, titled, “Your love of index funds is terrible for our economy.” It cried out for a response.

There are three reasons why indexing has become so popular: it costs less — often much less. High fees are a drag on returns; compounded over decades, they lead to a 20 to 30 percent penalty on total returns. Next, the alternative is active-stock or mutual-fund selection or some form of market timing. Academic research overwhelming shows that the vast majority of investors lack the skills or discipline to do that. Attempts at outperformance invariably lead to underperformance. Last, even among those who have the requisite skills, the discipline and emotional control necessary to successfully manage money is intermittent at best, absent at worst.

Back to the issue of index funds: the author identifies three reasons why index funds are an economic threat. Let’s take each of these in order:

Here are the three claims he takes on. Click the link to read his responses.

Quote

“Index funds contribute to market melt-ups and meltdowns”

Quote

“Index funds reduce the quality of stock analysis”

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“Index funds contribute to poor corporate governance”


Here's his finish. Basically when your big, fat paycheck is at risk by a better way to invest you have to tear it down at all costs.

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The complaints about indexing have become tiresome: indexing is Marxist, it’s a bubble waiting to burst, it’s dangerous to the economy or the efficiency of the market, and so on. The need to relitigate every lost battle is telling. The people who want to sell you newsletters, expensive mutual funds, or costly trading advice have suffered greatly from the move toward low-cost, passive investing. No wonder so many of them refuse to accept the obvious benefits of indexing to average investors.

" 'Individual conscience' means that women only get contraceptives if their employers, their physicians, their pharmacists, their husbands and/or fathers, pastors, and possibly their mayors, Governors, State Secretaries of Health, Congressmen, Senators, and President all agree that in that particular case they're justifiable." --D.C. Sessions

"That's the problem with being implacable foes - no one has any incentive to treat you as anything more than an obstacle to be overcome."

"The 'Road to Serfdom' is really all right turns." --Progressive Whisperer

""The GOP ... where every accusation is also a confession." --Progressive Whisperer

#31 JackD

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Posted 04 January 2019 - 03:42 PM

The discussion about the best approach to the market by amateurs revives the question about its value, if any, to the economy. Since most people with savings find themselves in need of some mechanism of having their money work for them with sufficient return to support retirement, to the extent the market does that I guess it contributes to the economy because it allows retirees some discretionary spending. Without available discretionary spending, it's hard to see how an economy grows. Of course, that assumes that growth is actually good for an economy.

#32 baw1064

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Posted 04 January 2019 - 05:43 PM

View PostLFC, on 04 January 2019 - 02:41 PM, said:

Barry Ritholtz responds to an article at MarketWatch entitled Your Love of Index Funds Is Terrible for Our Economy by somebody named Michael Brush. Brush blames index funds for all sorts of evils in the market. Ritholtz is having none of it.
Here's his finish. Basically when your big, fat paycheck is at risk by a better way to invest you have to tear it down at all costs.

"Your love of index funds is terrible for our economy" is actually a completely true statement,*



*if by "our" you mean those people whose livelihood depends on getting investors to overpay for underperformance.
“Unless someone like you cares a whole awful lot, Nothing is going to get better. It's not.” --Dr. Seuss

#33 baw1064

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Posted 04 January 2019 - 05:46 PM

What I would like to see happen is Blackrock, Vanguard, and State Street get together and use their combined leverage to push down C-suite salaries. If you own a significant fraction of every company, you can do that, because CEOs won't be able to get a lucrative deal anywhere else.

If all company management were paid one-third or one-half as much, the only difference would be greater profits to distribute to shareholders.
“Unless someone like you cares a whole awful lot, Nothing is going to get better. It's not.” --Dr. Seuss

#34 J-CA

    Probably in one of my drunken stupors..

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Posted 04 January 2019 - 10:28 PM

View PostJackD, on 04 January 2019 - 03:42 PM, said:

The discussion about the best approach to the market by amateurs revives the question about its value, if any, to the economy. Since most people with savings find themselves in need of some mechanism of having their money work for them with sufficient return to support retirement, to the extent the market does that I guess it contributes to the economy because it allows retirees some discretionary spending. Without available discretionary spending, it's hard to see how an economy grows. Of course, that assumes that growth is actually good for an economy.
Index funds just introduce competition, they provide a benchmark by which active traders should be judged.
If amateurs are outperformed by index funds less the fees the amateurs know to give up.
If the professionals are outperformed by index funds after accounting for the difference in fees those professionals should go find other jobs.

I think the availability of discretionary spending for retirees is a separate issue, they could throw all their money into bonds!
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#35 JackD

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Posted 05 January 2019 - 12:08 AM

If they threw all their money into bonds, would they do as well?

#36 baw1064

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Posted 05 January 2019 - 01:35 AM

View PostJackD, on 05 January 2019 - 12:08 AM, said:

If they threw all their money into bonds, would they do as well?

Depends if you adjust for risk. :)
“Unless someone like you cares a whole awful lot, Nothing is going to get better. It's not.” --Dr. Seuss

#37 JackD

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Posted 05 January 2019 - 11:41 AM

I think that historically the answer is they wouldn't do as well but that is 20/20 hindsight. If all the retirees and 401(k) investors were in bonds, the interest rate wouldn't be very productive would it? Or even just the retirees?

#38 J-CA

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Posted 05 January 2019 - 08:04 PM

View PostJackD, on 05 January 2019 - 12:08 AM, said:

If they threw all their money into bonds, would they do as well?
I think that if they invested all their money in index funds instead they would do slightly better! ;)

Let's reinterpret your question in light of the context of your original question:

View PostJackD, on 04 January 2019 - 03:42 PM, said:

The discussion about the best approach to the market by amateurs revives the question about its value, if any, to the economy. Since most people with savings find themselves in need of some mechanism of having their money work for them with sufficient return to support retirement, to the extent the market does that I guess it contributes to the economy because it allows retirees some discretionary spending. Without available discretionary spending, it's hard to see how an economy grows. Of course, that assumes that growth is actually good for an economy.
Which is better for the economy?
1. Retirees invest all their 401k savings in the bond market, professionally managed retirement funds invest as they normally do, the rest of the market does whatever the consequences of that are. We assume that the net return of the 401ks is lower, and thus the return for the managed funds and the rest of the market is slightly greater - i.e. zero sum.
2. Retirees carry on with the status quo doing whatever they do now.

So you would start with: how much lower would we expect the return to be in scenario 1?
I found this nifty article: https://www.pionline...rom-end-of-2017
The entire IRA market right now is $9.2T, the 401k market is $5.2T, the entire retirement market is $28T. More interesting is that of the 401k $3.5T is in mutual funds, mutual funds are.. pretty bad.. so that raises some questions about how much investors would be losing by switching to bonds given the fees they are paying already.
And then given those numbers the other question is just how much that extra money flooding into the bond market would depress the market itself, $5.2T is a lot of money. The US bond market is about $40T of assets, so that is 5% of the total market - but some of that $5.2T would already be in bonds, so it is not like it would be a complete flooding of the market but it would be significant.
So I don't know how much worse peoples' returns would be but they probably would be worse, on the other hand they would almost certainly be far more reliable.

And then the follow-on question would be, would those lower returns & lower discretionary spending for retirees in scenario 1 be bad for the economy?
This is fun to think about, I mean does the size of the nest egg a retiree with a 401k actually impact their spending? If a retiree wealthy enough to have a 401k of significant size actual change their behaviour based on the balance when they retire? My personal opinion is probably not, Fidelity provides data that shows that 401k money doesn't seem to get drawn out that fast, I looked for stats on the 401k amount passed into estates every year but I couldn't find it - I think that number would give us some real insight.

I think that the reliable returns of bond-only 401ks would have some positive economic effects ancillary to the rate of return. I always think of the people that saw their retirement balances shrink in 2008 and then concluded that they needed to keep working, hanging on no matter what, leveraging their seniority to avoid being laid off. Effectively making a tight labour market even tighter. In the bond-401k world they would see the opposite, a stressful work environment where cuts were being made and more and more being demanded of them would make their bond-backed retirement seem more appealing, not less.

And then what would happen to the surplus of returns to the other investors in the market?
I don't know, but they would do something with the money, certainly some of those returns would be spent in the "real" economy.

In summary: It is an interesting question and I have no real idea what the answer is but I think the answer is that it wouldn't be a very large difference.
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#39 baw1064

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Posted 05 January 2019 - 08:38 PM

It looks like I need to explain my remark about adjusting for risk a little more.

In general, equities have higher risk and higher expected return than bonds. Simply put, companies go out of business more often than entities default on bonds. One of the underpinnings of Modern Portfolio Theory is that investors want to maximize returns but are risk averse. So investors aren't going to invest in stocks (inherently more risky than bonds) unless the greater risk is compensated by a greater expected return.

MPT isn't completely accurate, but IMO is good enough to be a useful framework for understanding financial markets.

How does one quantify "risk"? One common way is to look at the historical year to year variance of returns; e.g. the S&P lost about 12% in 2018, gained about 20% in 2017, etc. This variance proxy for risk clearly is imperfect, but again is somewhat useful. In general the expected return of an asset class (proxied by the long term historical average) tends to go as the square root of the variance. So if stocks tend to have twice the return as bonds over time, you would expect their year to year returns to fluctuate four times as much. A quantity called the Sharpe Ratio (expected return^2/variance) is a measure of how well a given portfolio is at being adequately compensated for the risk it's taking.

So in short a retirement portfolio consisting only of bonds will probably not have as high a return as one consisting of stocks, but it also has much less chance of a large, sudden drop in its value (think 2008, or the least few months).
“Unless someone like you cares a whole awful lot, Nothing is going to get better. It's not.” --Dr. Seuss

#40 JackD

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Posted 05 January 2019 - 09:46 PM

The Fidelity data is interesting. My personal observation of the behavior of fellow retirees, anecdotal to the nth degree, is that a growing portfolio goes along with freer spending and that a wildly fluctuating market like today's tends to induce hunkering down.

As far as the risk factors influence the investing of retirees, the 2008 experience is instructive. Those who are not actively trading on their own and who are using professional investment advisers tend (assuming sufficient capital) to hold onto their positions and ultimately not really get hurt. Of course timing is everything.





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